Alethena Brings Security Token Offerings to Switzerland
Cryptovest asked Alethena, one of the early supporters of the STO trend, about its approach to legality, transparency, and cybersecurity.
Swiss-based startup Alethena has completed the tokenization of its entire share capital on the Ethereum blockchain, becoming a European pioneer in the security token offerings (STO) space, the company said in an emailed statement to Cryptovest, which reached out with questions on the mechanics and the legality of performing an STO.
What is Alethena and what is its role in the security token ecosystem?
Alethena is the first blockchain-asset rating agency in Switzerland, well-connected with the Crypto Valley. Our aim is to empower the professionalization of the crypto market by providing due diligence expertise in this new field. From our own financing round and many talks with family offices, asset managers, and other professional investors, we understood that it is key for them to have claimable rights in their investment, meaning they are not interested in utility token investments but in venture capital (equity-based). As we are a very solution-oriented team, we did not want to wait until someone else came up with a suitable solution here in Switzerland, so we decided to become pioneers in tokenizing our entire share capital.
(Note: Alethena completed the token distribution on December 13.)
What does it take to turn a security into a token? Can you briefly describe the steps a business needs to take to tokenize its shares, for example?
There are two dimensions to differentiate: legal and technical. From the legal perspective, our solution has now been prototyped in the Swiss jurisdiction but can also be adapted for other jurisdictions. It requires an adaption of the bylaws of the limited company, the proof of the responsible government body, and some notary attestation. From the technical perspective, our prototype works on Ethereum (ERC20 standard) but is blockchain-agnostic, meaning there is a feasible solution on, for example, EOS. Ours calls for the set-up of a smart contract, including the features required from the company that is tokenizing. Last but not least, there is an electronic share register required, which will be provided by our partners from Ledgy (https://www.legdy.com).
How do you ensure that only quality businesses and reliable stock are tokenized?
Our core competence is due diligence. Therefore, all of our clients go through risk analysis to keep the threat of tokenizing a scam to the absolute minimum. In the long term, we aim to have companies with tokenized shares publicly rated by Alethena.
What type of investor are you targeting? Can retail investors, with small-scale investments, access security tokens?
We are fully convinced that every investor, independent of the investment size, should be able to invest in security tokens as blockchain technology can facilitate access and allows greater diversification of investments. Nonetheless, all the regulatory and legal requirements must be fulfilled.
What are the challenges of launching a security token exchange? How is it different compared to current crypto exchanges?
We need to keep in mind that decentralized exchanges have pretty lax requirements, but they also have insignificant trading volumes as only peer-to-peer transactions are enabled. If we are talking about centralized exchanges, the biggest challenge is obtaining the required licenses, the so-called security broker license. We expect the first centralized crypto exchanges to receive this license by the second or third quarter of 2019. A further challenge is control over projects and their listed tokens, whether they fulfill all the required guidelines.
Have you audited the smart contracts? What is Alethena's approach to cyber security?
We have in-house knowledge to execute smart contract audits but are collaborating with our partners from Chain Security (www.chainsecurity.com) in case we need an in-depth audit and/or smart contract optimization.
What token standard are you using? Can the tokens be centrally frozen, revoked, or created?
We are using the ERC20 standard for our own solution but as already mentioned, our approach is blockchain-agnostic and can be transferred to EOS or other blockchain solutions as well. Here is how we describe the technical features: “The smart contract code for the Alethena Shares contract is an ERC20 token intended to make shares (‘Namensaktien’) tradeable on the blockchain. It is based on the open-zeppelin library with the additional feature that tokens on lost addresses can be recovered.”
In the case of tokens representing real-world assets such as shares of a company, one needs a way to handle lost private keys. With physical certificates, courts can declare share certificates invalid, so the company can issue replacements. Here, we want a solution that does not depend on third parties to resolve such cases. Instead, when someone has lost a private key, they can use the `declareLost` function to post a collateral and claim that the shares assigned to a specific address are lost.
To prevent frontrunning, a commit reveal scheme is employed. If users actually own the shares, they need to wait for a certain period and can then reclaim the lost shares plus the collateral. If the user is an attacker trying to claim shares belonging to someone else, he or she risks losing the collateral as it can be claimed at any time by the rightful owner. Furthermore, the company itself can delete claims at any time (the collateral will be refunded). In order to use this functionality, one needs to trust the company to do the right thing and to handle potential disputes responsibly. If you do not trust the company to do so, make sure you do not lose your private keys!
What are the biggest risks with launching, handling, and trading security tokens as opposed to traditional securities?
The biggest risk probably lies in the area of professionalization and standardization of in-house processes at the respective company. While we only have companies of a certain size listed on traditional exchanges, the first ventures to be listed on crypto exchanges will be smaller ones with fewer people, less expertise, and fewer specialists in the area of legal, compliance, and investor relations.
Which is the most suitable European jurisdiction to launch security tokens? Are companies restricted by national laws? Why is Switzerland friendly to this type of asset?
It is quite difficult to say which jurisdiction might be the most suitable one as we are really in the beginning, and there are different advantage and disadvantages in all the areas. Switzerland provides a stable environment and a supportive government.
How will the bear market and capitulation selling affect security tokens? How will their price decouple from Bitcoin and Ethereum?
The bear market gives companies like ours time to develop solutions and work on projects as the operational business is rather weak at this time. Security tokens and the tokenization of shares will be the next big wave that will also go in line with price increases with Bitcoin and Ethereum as the market is still very small and correlations are high. From a fundamental perspective, a decoupling of the prices is possible or is even to be expected in the longer term, also depending on whether ETH and BTC remain the primary funding sources or stablecoins replace them.
Neither the author nor the publication assumes any responsibility or liability for any investments, profits, or losses made as a result of this information. Cryptocurrency trading and investing are risky propositions, and market participants are advised to always conduct thorough research.